T12: Trailing Twelve Months Definition and Explanation
Trailing Twelve Months, which is also referred to as T12 or TTM, is a financial statement that attempts to provide a comprehensive picture of a property’s operations over the previous twelve-month period. T12 is important for both investors looking to purchase and finance a property as well as lenders who are underwriting a property for a potential commercial real estate loan. A T12 looks at gross rental income and subtracts operating expenses to calculate a property’s net operating income (NOI).
T12 is more important for multifamily properties than for other types of real estate, as apartment leases are generally issued for 12-month periods. In contrast, office, retail, and industrial properties often have 5, 10, or even 25+ year leases.
What Is The Difference Between a T12 and a T3?
A T12 contains the financials of a property for the last 12 months, while a T3 contains the financials of a property for the last 3 months.
T12 Example and Explanation
Like other financial statements, T12 contains both revenue and expenses. Below, we will look at the parts of a T12 for a sample property and explain how each section works.
The first thing a T12 document looks at is a property’s gross potential rent (GPR), which consists of the number of units multiplied by the market rent. Let’s say a unit has 20 units, each of which is rented out for $2,000 a month at market prices.
This would make the GPR $480,000 (20 * 12 * $2,000)
The T12 document will then first subtract rental related expenses such as:
Bad Debt: $5,000
Vacancy: 5% ($24,000)
This gives us a net effective rent of $451,000.
Then, the document will add other income sources, including:
Laundry Income: $2,000
Parking Income: $5,000
Pet Income: $4,000
Miscellaneous Income and Fees: $2,000
This gives us an additional income of $13,000 leading to a gross operating income of $464,000.
Then, we will subtract operating expense (OpEx), including:
Management Fees: 12% of net effective rent ($54,120)
Administrative Fees/Payroll: 5% of net effective rent ($22,500)
Repairs and Maintenance (R&M): $20,000
Contract Services: $10,000
Utilities: 100/month * 19 units ($22,880)
Insurance: $15,000
Property Taxes: $90,000
All of this will culminate with a calculation of the property’s net operating income (NOI), which, in this example, is $229,500.
What Should Investors and Lenders Look for in a T12 Document?
If you’re an investor (or lender) looking at the T12 of a property you are considering purchasing, there are a variety of ways to analyze it. One major lens to look through is the concept of controllable expenses vs. uncontrollable expenses. For example, some expenses, such as vacancy and repairs and maintenance, may be able to be reduced via improved property management,
In contrast, other expenses, such as insurance and taxes, generally cannot be reduced.
For lenders, a high level of uncontrollable expenses, particularly expenses that may increase over time (such as high taxes) represent a potential risk. Lenders who see a high level of uncontrollable expenses may offer a smaller loan (lower LTV) or may decide not to finance the property altogether.
Lenders, of course, also look at controllable expenses, and will often be more cautious when they see issues such as a high vacancy rate, lots of rental concessions, or excessive repair costs.
For investors looking to utilize a value-add investment strategy, the T12 document is a great way to look into the potential of improving the value of the property while cutting potential costs.
For example, if rent is below market rent, for instance, and the property has an old paint job and shabby landscaping, a new owner could easily improve these aesthetic elements of the property and raise rents accordingly.
The status of a property’s utility costs is another area that the T12 can help highlight. For instance, if the current owner pays all the utilities, the new owner may consider installing submetering or a RUBS system (if allowed in that city and state) in order to transfer the financial burden of utilities onto the tenants, reducing expenses and increasing NOI.
What is the Difference Between an Offering Memorandum (OM) and a T12?
A commercial real estate offering memorandum (OM) is a document that pitches a commercial or multifamily property to potential sellers. In the case of a real estate syndication or private placement, it is designed to attract potential limited partners (LPs) to invest their money in the property. It will typically involve images of the property, general property information, summaries of the executives involved, a market overview, and forward-looking pro forma financial statements for the property.
These statements will attempt to show how the property could perform in an ideal financial scenario. Depending on the detail and the accuracy of the OM, it may or may not provide a T12, rent roll, or other documentation to demonstrate how the pro forma financial statements were calculated.
What Other Documents Do Investors and Lenders Look At?
Along with a property’s T12 and T3, there are several other documents that are essential for investors and lenders to look at. These include:
Rent Roll: A rent roll is a document that lists all of the tenants in a multifamily or commercial property, along with their contact information and rent payments. It is typically used by landlords and lenders to keep track of income and vacancy rates. A rent roll differs from a T12 due to the fact that it provides more specific information about tenants and does not reference the operating expenses of the property, nor does it attempt to calculate the property’s NOI.
In most cases, the rent roll is updated on a monthly or quarterly basis. However, it’s important to keep in mind that rent rolls can change rapidly, due to tenants moving in or out of a property. As such, it is important to make sure that any rent roll you’re looking at has been recently updated to ensure accuracy. In addition to tenant names, contact info, and rent a rent roll will generally contain info including:
Market rental rate
Physical Occupancy
Unit Numbers
Square footage of the units
Physical Occupancy
Move Ins/Move Outs/Renewals
Deposit or Surety Bond Amount
Recurring Rental Concessions
SREO: SREO, or Schedule of Real Estate Owned, is a report that lenders use to get a financial snapshot of other investment properties that a borrower owns. SREOs are important because they help lenders understand the risk involved in lending to a borrower with a portfolio of real estate properties.
When reviewing an SREO, lenders will look at the value of the properties, the amount of debt on each property, and the borrower's ability to make mortgage payments on time. They will also look at each property's location and condition to determine whether it is a good investment.
By understanding a borrower's SREO, lenders can gauge the risk of an investor’s entire portfolio, allowing them to make more informed decisions about whether (and how much) to lend to the prospective borrower, and what interest rate to charge.
Personal Financial Statement (PFS): A PFS, or Personal Financial Statement, is a document that lenders often require from either the key principal (KP) borrower or the sponsor of the project (if it has a separate sponsor) in order to qualify them for a loan.
The PFS provides an overview of the sponsor's net worth, assets, and liquidity, and helps the lender to assess the risk of lending to the sponsor. In general, if a deal has a sponsor with a high net worth and lots of liquid assets, this is considered to reduce the risk of the loan, making it more likely that the borrower will be approved. However, the PFS is just one factor that lenders consider when making a loan decision. Other factors such as the aforementioned SREO and rent roll documents, the sponsorship team's experience, and the project's feasibility also play a role.
These are just a few of the documents and third-party reports that may be required prior to the purchase or financing of a multifamily or commercial property. In most cases, other reports, such as a Phase I Environmental Assessment (Phase I ESA), will also need to be performed. If a lender is providing a loan for property remodeling or rehabilitation, other reports may be required, such as a construction cost estimate, as well as architectural and engineering reports.